Homework Assignment #3

Chapter 8, Problem2, page 249.Cash discount decision (LO1)Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?

Chapter 8, Problem4, page 249.Effective rate of interest (LO2)Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest?

Chapter 9, Problem6, page 282.Present value (LO9-3)Your aunt offers you a choice of $20,100 in 20 years or $870 today. If money is discounted at 17 percent, which should you choose?

Chapter 10, Problem27page 333.Common stock value (LO10-5)Stagnant Iron and Steel currently pays a $12.25 annual cash dividend (D0). The company plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 18 percent, what is the price of the common stock?

Chapter 11, Problem 2, page 363.Cost of capital (LO11-2)Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 11 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 9 percent return but would cost 15 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure.

a.Compute the weighted average cost of capital.

b.Which project(s) should be accepted?